10-Q 1 gs10q.htm

UNITED STATES
SECURITIES & EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

/X/ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Quarterly Period ended March 31, 2002

Commission File Number 0-18082

GREAT SOUTHERN BANCORP, INC.
(Exact name of registrant as specified in its charter)

DELAWARE
(State or other jurisdiction of incorporation or organization)

43-1524856
(IRS Employer Identification Number)

1451 E. BATTLEFIELD
SPRINGFIELD, MISSOURI
(Address of principal executive offices)

65804
(Zip Code)

(417) 887-4400
(Registrant's telephone number, including area code)

       Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes /X/     No /  /

       The number of shares outstanding of each of the registrant's classes of common stock: 6,868,169 shares of common stock, par value $.01, outstanding at May 6, 2002.



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PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.

GREAT SOUTHERN BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In thousands, except number of shares)

March 31,
2002
 December 31,
2001
(Unaudited)
ASSETS
Cash $   31,393  $   29,646 
Interest-bearing deposits in other financial institutions 187 
 5,474 
        Cash and cash equivalents 31,580  35,120 
Available-for-sale securities 257,397  233,805 
Held-to-maturity securities (fair value $34,342 - March 2002;
  $40,703 - December 2001) 31,066  37,465 
Mortgage loans held for sale 2,214  7,135 
Loans receivable, net of allowance for loan losses of $22,391 -
  March 2002; $21,328 - December 2001 957,570  957,751 
Interest receivable:
  Loans 5,607  5,147 
  Investments 1,202  2,063 
Prepaid expenses and other assets 5,559  7,464 
Foreclosed assets held for sale, net 2,506  3,057 
Premises and equipment, net 14,235  12,839 
Investment in Federal Home Loan Bank Stock 14,962  14,962 
Deferred income taxes 7,259 
 6,295 
     Total Assets $1,331,157 
 $1,323,103 
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $  937,469  $  886,870 
Federal Home Loan Bank advances 214,110  258,743 
Short-term borrowings 54,212  57,763 
Trust preferred securities 17,281  17,160 
Accrued interest payable 4,125  5,186 
Advances from borrowers for taxes and insurance 524  295 
Accounts payable and accrued expenses 4,181  2,983 
Income taxes payable 11,691 
 8,849 
        Total Liabilities 1,243,593 
 1,237,849 
Capital stock
  Serial preferred stock, $.01 par value; authorized 1,000,000 shares -- --
  Common stock, $.01 par value; authorized 20,000,000 shares; issued
    12,325,002 shares 123  123 
Additional paid-in capital 17,003  17,160 
Retained earnings 130,970  127,489 
Accumulated other comprehensive income:
  Unrealized appreciation (depreciation) on available-for-sale
    securities, net of income taxes of $(131) at March 31, 2002
    and $384 at December 31, 2001 (298)
 710 
147,798  145,482 
Less treasury common stock, at cost; March 2002 - 5,456,203 shares;
  December 2001 - 5,462,467 shares (60,234)
 (60,228)
        Total Stockholders' Equity 87,564 
 85,254 
        Total Liabilities and Stockholders' Equity $1,331,157 
 $1,323,103 



See Notes to Consolidated Financial Statements

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GREAT SOUTHERN BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share data)

THREE MONTHS ENDED
MARCH 31,
2002
 		2001
(Unaudited)
INTEREST INCOME
  Loans $15,673  $21,379 
  Investment securities and other 4,107 
 3,450 
        TOTAL INTEREST INCOME 19,780 
 24,829 
INTEREST EXPENSE
  Deposits 5,921  9,365 
  Federal Home Loan Bank advances 1,862  3,582 
  Short-term borrowings and trust preferred securities 327 
 624 
        TOTAL INTEREST EXPENSE 8,110 
 13,571 
NET INTEREST INCOME 11,670  11,258 
PROVISION FOR LOAN LOSSES 1,350 
 1,650 
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 10,320 
 9,608 
NON-INTEREST INCOME
  Commissions 1,488  1,740 
  Service charges and ATM fees 1,846  2,004 
  Net realized gains on sales of loans 438  356 
  Net realized gains on available-for-sale securities 595  -- 
  Expense on foreclosed assets (327) (82)
  Other income 417 
 323 
        TOTAL NON-INTEREST INCOME 4,457 
 4,341 
NON-INTEREST EXPENSE
  Salaries and employee benefits 3,857  3,583 
  Net occupancy and equipment expense 1,159  1,039 
  Postage 329  310 
  Insurance 124  114 
  Amortization of goodwill --  37 
  Advertising 110  164 
  Office supplies and printing 205  208 
  Other operating expenses 850 
 1,239 
        TOTAL NON-INTEREST EXPENSE 6,634 
 6,694 
INCOME BEFORE INCOME TAXES 8,143  7,255 
PROVISION FOR INCOME TAXES 2,741 
 2,528 
NET INCOME $  5,402 
 $  4,727 
BASIC EARNINGS PER COMMON SHARE $.79 
 $.69 
DILUTED EARNINGS PER COMMON SHARE $.78 
 $.67 
DIVIDENDS DECLARED PER COMMON SHARE $.27 
 $.13 



See Notes to Consolidated Financial Statements

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GREAT SOUTHERN BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)

THREE MONTHS ENDED MARCH 31,
2002
 2001
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
  Net income $   5,402  $   4,727 
  Proceeds from sales of loans held for sale 20,939  15,345 
  Originations of loans held for sale (14,704) (12,372)
  Items not requiring (providing) cash:
    Depreciation 576  471 
    Amortization 36  37 
    Provision for loan losses 1,350  1,650 
    Provision for losses on foreclosed assets 204  -- 
    Gain on sale of loans (438) (356)
    Net realized (gains) losses on sale of available-for-sale securities (595) -- 
    (Gain) loss on sale of premises and equipment (109) 1 
    (Gain) loss on sale of foreclosed assets (24) 14 
    Amortization of deferred income, premiums and discounts 19  (875)
    Deferred income taxes (449) (339)
  Changes in:
    Accrued interest receivable 401  695 
    Prepaid expenses and other assets (41) (477)
    Accounts payable and accrued expenses (926) (251)
    Income taxes refundable/payable 2,842 
 2,866 
        Net cash provided by operating activities 14,483 
 11,136 
CASH FLOWS FROM INVESTING ACTIVITIES
  Net increase in loans (5,710) (13,426)
  Purchase of loans (5,100) (4,796)
  Proceeds from sale of student loans 7,843  8,182 
  Purchase of premises and equipment (2,110) (977)
  Proceeds from sale of premises and equipment 247  217 
  Proceeds from sale of foreclosed assets 1,542  374 
  Capitalized costs on foreclosed assets (48) (59)
  Proceeds from maturing held-to-maturity securities 10,000  7,250 
  Proceeds from called investment securities 7,000  59,706 
  Principal reductions on mortgage-backed securities 7,713  45 
  Purchase of held-to-maturity securities (3,600) (920)
  Proceeds from sale of available-for-sale securities 70,694  4,132 
  Purchase of available-for-sale securities (110,148) (86,554)
  Purchase of Federal Home Loan Bank stock -- 
 (24)
        Net cash used in investing activities (21,677)
 (26,850)
CASH FLOWS FROM FINANCING ACTIVITIES
  Net increase in certificates of deposit 35,201  46,778 
  Net increase in checking and savings deposits 17,429  2,515 
  Proceeds from Federal Home Loan Bank advances 893,000  802,750 
  Repayments of Federal Home Loan Bank advances (937,633) (800,026)
  Net decrease in short-term borrowings (3,551) (26,134)
  Net increase in advances from borrowers for taxes and insurance 229  344 
  Purchase of treasury stock (251) (43)
  Dividends paid (858) (862)
  Stock options exercised 88 
 8 
        Net cash provided by financing activities 3,654 
 25,330 
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (3,540) 9,616 
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 35,120 
 40,101 
CASH AND CASH EQUIVALENTS, END OF PERIOD $  31,580 
 $  49,717 
See Notes to Consolidated Financial Statements

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GREAT SOUTHERN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1: BASIS OF PRESENTATION

       The accompanying unaudited interim consolidated financial statements of Great Southern Bancorp, Inc. (the "Company") have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. The financial statements presented herein reflect all adjustments which are, in the opinion of management, necessary to fairly present the financial position, results of operations and cash flows of the Company for the periods presented. Those adjustments consist only of normal recurring adjustments. Operating results for the three months ended March 31, 2002 and 2001 are not necessarily indicative of the results that may be expected for the full year. The consolidated statement of financial condition of the Company as of December 31, 2001, has been derived from the audited consolidated statement of financial condition of the Company as of that date.

       Certain information and note disclosures normally included in the Company's annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for 2001 filed with the Securities and Exchange Commission.

NOTE 2: OPERATING SEGMENTS

       The Company's banking operation is its only reportable segment. The banking operation segment is principally engaged in the business of originating residential and commercial real estate loans, commercial business loans and consumer loans. These loans are funded through the attraction of deposits from the general public, brokered deposit originations, and borrowings from the Federal Home Loan Bank ("FHLBank") and others. The operating results of this segment are regularly reviewed by management to make decisions about resource allocations and to assess performance.

       The following table provides information about segment profits and has been prepared using the same accounting policies as those described in Note 1. There are no material inter-segment revenues, thus no reconciliations to amounts reported in the consolidated financial statements are necessary. Revenue from segments below the reportable segment threshold is attributable to three operating segments of the Company. These segments include an insurance agency, a travel agency, and discount brokerage services.

Three Months Ended March 31, 2002
Banking
All Other
Totals
(In thousands)
Interest income $19,766 $ 14 $19,780
Non-interest income 2,951 1,506 4,457
Segment profit 5,250 152 5,402




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Three Months Ended March 31, 2001
Banking
All Other
Totals
(In thousands)
Interest income $24,816 $ 13 $24,829
Non-interest income 2,603 1,738 4,341
Segment profit 4,546 181 4,727

NOTE 3: COMPREHENSIVE INCOME

       Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income", requires the reporting of comprehensive income and its components. Comprehensive income is defined as the change in equity from transactions and other events and circumstances from non-owner sources, and excludes investments by and distributions to owners. Comprehensive income includes net income and other items of comprehensive income meeting the above criteria. The Company's only component of other comprehensive income is the unrealized gains and losses on available-for-sale securities.

Three Months Ended
March 31,
2002
2001
(In thousands)

Net income
$ 5,402 
$ 4,727 
Unrealized holding gains (losses), net of income taxes (621) 283 
Less: reclassification adjustment for gains included in
  net income, net of income taxes 387 
 -- 
(1,008)
 283 
Comprehensive income $ 4,394 
 $ 5,010 

NOTE 4: CHANGES IN ACCOUNTING PRINCIPLES

       The Company has adopted Statement of Financial Accounting Standards ("SFAS") 141, Business Combinations. This Statement establishes new standards for financial accounting and reporting for business combinations. This Statement eliminates the pooling-of-interests method and requires that all business combinations be accounted for using the purchase method. Initial adoption of SFAS 141 had no effect on the Company's financial statements.

       The Company has adopted SFAS 142, Goodwill and Other Intangible Assets. This Statement establishes new financial accounting and reporting standards for acquired goodwill and other intangible assets. The Statement addresses how intangible assets that are acquired individually or with a group of other assets (but not those acquired in a business combination) should be accounted for in financial statements upon their acquisition. It also addresses how goodwill and other intangible assets (including those acquired in a business combination) should be accounted for after they have been initially recognized in the financial statements. Initial adoption of SFAS 142 had no effect on the Company's financial statements.



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       The Company has adopted SFAS 144, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of. This Statement addresses how and when to measure impairment on long-lived assets and how to account for long-lived assets that an entity plans to dispose of either through sale, abandonment, exchange or distribution to owners. The Statement also requires expected future operating losses from discontinued operations to be recorded in the period in which the losses are incurred rather than at the measurement date. Initial adoption of SFAS 144 had no effect on the Company's financial statements.

NOTE 5: SUBSEQUENT EVENT

       On December 10, 2001, the Company attempted to sell all its holdings of the common stock of a publicly traded company. On December 13, 2001, the counterparty refused to complete and rescinded the transaction. As a result, as of March 31, 2002, the Company was still the owner of record of and continued to hold the stock it attempted to sell, which it continued to report as an equity security available for sale carried at fair value.

       The Company agreed to sell and did sell on April 2, 2002 all shares of stock of this publicly traded company owned by Great Southern for approximately $9.9 million, resulting in realized pre-tax gain on the sale of approximately $2.2 million. In addition, as a shareholder of record as of April 1, 2002, the Company received a cash dividend of approximately $167,000 paid on April 12, 2002.



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ITEM II. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

       When used in this Form 10-Q and in future filings by the Company with the Securities and Exchange Commission (the "SEC"), in the Company's press releases or other public or shareholder communications, and in oral statements made with the approval of an authorized executive officer, the words or phrases "will likely result," "are expected to," "will continue," "is anticipated," "estimate," "project" or similar expressions are intended to identify "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are subject to certain risks and uncertainties, including, among other things, changes in economic conditions in the Company's market area, changes in policies by regulatory agencies, fluctuations in interest rates, demand for loans and deposits in the Company's market area and competition, that could cause actual results to differ materially from historical earnings and those presently anticipated or projected. The Company wishes to advise readers that the factors listed above could affect the Company's financial performance and could cause the Company's actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods in any current statements.

        The Company does not undertake-and specifically disclaims any obligation- to publicly release the result of any revisions which may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.

General

        The following should be read in conjunction with Management's Discussion and Analysis in the Company's December 31, 2001 Form 10-K.

        The profitability of the Company, and more specifically, the profitability of its primary subsidiary, Great Southern Bank (the "Bank"), depends primarily on its net interest income. Net interest income is the difference between the interest income the Company earns on its loans and investment portfolio, and the interest it pays on interest-bearing liabilities, which consists mainly of interest paid on deposits and borrowings. Net interest income is affected by the relative amounts of interest-earning assets and interest-bearing liabilities and the interest rates earned or paid on these balances. When interest-earning assets approximate or exceed interest-bearing liabilities, any positive interest rate spread will generate net interest income.

        The Company's profitability is also affected by the level of its non-interest income and non-interest expense. Non-interest income consists primarily of net realized gains on sales of loans and available-for-sale securities, service charges and ATM fees, commissions earned by non-bank subsidiaries and other general operating income. Non-interest expense consists primarily of salaries and employee benefits, net occupancy and equipment expenses, postage, insurance, advertising, office supplies and printing and other general operating expenses.



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        The operations of the Bank, and banking institutions in general, are significantly influenced by general economic conditions and related monetary and fiscal policies of regulatory agencies. Deposit flows and the cost of deposits and borrowings are influenced by interest rates on competing investments and general market rates of interest. Lending activities are affected by the demand for financing real estate and other types of loans, which in turn are affected by the interest rates at which such financing may be offered and other factors affecting loan demand and the availability of funds.

Effect of Federal Laws and Regulations

        Federal legislation and regulation significantly affect the banking operations of the Company and the Bank, and have increased competition among commercial banks, savings institutions, mortgage banking enterprises and other financial institutions. In particular, the capital requirements and operations of regulated depository institutions such as the Company and the Bank have been and will be subject to changes in applicable statutes and regulations from time to time, which changes could, under certain circumstances, adversely affect the Company or the Bank.



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Asset and Liability Management and Interest Rate Risk

        A principal operating objective of the Company is to produce stable earnings by achieving a favorable interest rate spread that can be sustained during fluctuations in prevailing interest rates. The Company has sought to reduce its exposure to adverse changes in interest rates by attempting to achieve a closer match between the periods in which its interest-bearing liabilities and interest-earning assets can be expected to reprice through the origination of adjustable-rate mortgages and loans with shorter terms to maturity, the purchase of other shorter term interest-earning assets and the use of interest rate swap agreements as hedges.

        The rates of interest the Bank earns on assets and pays on liabilities generally are established contractually for a period of time. Market interest rates change over time. Accordingly, the Company's results of operations, like those of other financial institutions, are impacted by changes in interest rates and the interest rate sensitivity of the Company's assets and liabilities. The risk associated with changes in interest rates and the Company's ability to adapt to these changes is known as interest rate risk and is the Company's most significant market risk.

        The term "interest rate sensitivity" refers to those assets and liabilities that mature within a stated period or reprice within that period in response to fluctuations in market rates and yields. As noted above, one of the principal goals of the Company's asset/liability program is to maintain and match the interest rate sensitivity characteristics of the asset and liability portfolios.

        In order to properly manage interest rate risk, the Bank's Board of Directors has established an Asset/Liability Management Committee ("ALCO") made up of members of management to monitor the difference between the Bank's maturing and repricing assets and liabilities and to develop and implement strategies to manage the "gap" between the two. The primary responsibilities of the committee are to assess the Bank's asset/liability mix, recommend strategies to the Board that will enhance income while managing the Bank's vulnerability to changes in interest rates and report to the Board the results of the strategies used. At times, depending on the level of general interest rates, the relationship between long- and short-term interest rates, market conditions and competitive factors, the ALCO may determine to increase the Bank's interest rate risk position in order to maintain its net interest margin. The Company's experience with interest rates is discussed in more detail under the heading "Results of Operations and Comparison of the Three Months Ended March 31, 2002 and 2001."



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        An important element of both earnings performance and liquidity is the management of interest rate sensitivity. Interest rate sensitivity reflects the potential effect on net interest income of a movement in interest rates. The difference between the Bank's interest-sensitive assets and interest-sensitive liabilities for a specified time frame is referred to as "gap." A financial institution is considered to be asset-sensitive, or have a positive gap, when the amount of its earning assets maturing or repricing within a given time period exceeds the amount of its interest-bearing liabilities also maturing or repricing within that time period. Conversely, a financial institution is considered to be liability-sensitive, or have a negative gap, when the amount of its interest-bearing liabilities maturing or repricing within a given period exceeds the amount of earning assets also maturing or repricing within that time period. During a period of rising interest rates, a positive gap would tend to increase net interest income, while a negative gap would tend to have an adverse effect on net interest income. During a period of falling interest rates, a positive gap would tend to have an adverse effect on net interest income, while a negative gap would tend to increase net interest income. At March 31, 2002, the Bank maintained a one-year gap position that was slightly positive.

        The Bank, through the ALCO, evaluates interest sensitivity risk and then formulates guidelines regarding asset generation, funding sources and the pricing of each, and off-balance sheet commitments in order to decrease sensitivity risk. These guidelines are based upon management's outlook regarding future interest rate movements, the state of the regional and national economy and other financial and business risk factors. The Bank uses a static gap model and a computer simulation to measure the effect on net interest income of various interest rate scenarios over selected time periods. The Bank's gap can be managed by repricing assets or liabilities, selling available-for-sale investments, replacing an asset or liability prior to maturity or adjusting the interest rate during the life of an asset or liability. Matching the amount of assets and liabilities repricing during the same time interval helps to reduce the risk and minimize the impact on net interest income in periods of rising or falling interest rates.

       As a part of its asset and liability management strategy, the Bank has, throughout the past several years, increased its investment in loans which are interest rate sensitive by emphasizing the origination of adjustable-rate, one- to four-family residential loans and adjustable-rate or relatively short-term commercial real estate, commercial business and consumer loans, and originating fixed-rate, one- to four-family residential loans primarily for immediate resale in the secondary market. Approximately 45% of total assets are currently invested in commercial real estate, construction, and commercial business loans. This part of the strategy was designed to improve asset yield and fee income, to shorten the average maturity and increase the interest rate sensitivity of the loan portfolio. While efforts to date have contributed to the changes in the one-year interest rate sensitivity gap and increased net interest income, such lending has increased the Bank's risk levels, and has resulted in an increase in the level of non-performing assets. Management continually evaluates existing and potential commercial real estate and commercial business loans, in order to try to reduce undesirable risks including concentrations in a given geographic area or a particular loan category.

       In addition, the Company uses interest rate swaps to manage its interest rate risks from recorded financial liabilities. These instruments are utilized when they can be demonstrated to effectively hedge a designated liability and such liability exposes the Company to interest rate risk.



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       Interest rate risk exposure estimates (the sensitivity gap) are not exact measures of an institution's actual interest rate risk. They are only indicators of interest rate risk exposure produced in a simplified modeling environment designed to allow management to gauge the Bank's sensitivity to changes in interest rates. The estimates do not necessarily indicate the impact of general interest rate movements on the Bank's net interest income because the repricing of certain categories of assets and liabilities is subject to competitive and other factors beyond the Bank's control. As a result, certain assets and liabilities indicated as maturing or otherwise repricing within a stated period may in fact mature or reprice at different times and in different amounts and would therefore cause a change (which potentially could be material) in the Bank's interest rate risk.



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COMPARISON OF FINANCIAL CONDITION AT MARCH 31, 2002 AND DECEMBER 31, 2001

       During the three months ended March 31, 2002, total assets increased by $8.1 million to $1.33 billion. Available-for-sale securities increased $23.6 million and net premises and equipment increased $1.4 million, partially offset by a decline in cash and cash equivalents of $3.5 million, a decrease of $6.4 million in held-to-maturity securities and a decrease of $4.9 million in mortgage loans held for sale.

       Total liabilities increased $5.7 million to $1.24 billion. Deposits increased $50.6 million, partially offset by a decrease in FHLBank advances of $44.6 million and a decrease in short-term borrowings of $3.6 million. The deposit increase was primarily from both brokered deposits and retail certificates of deposit. Retail certificates of deposit increased $24 million to $331 million. Total brokered deposits were $358 million at March 31, 2002. The weighted average cost of these deposits was approximately 156 basis points higher than the retail certificate of deposit portfolio, excluding the effect of the Company's interest rate swaps on a portion of these brokered certificates of deposit. The interest rate swaps reduced the weighted average cost of the brokered certificate of deposit portfolio to a rate that is approximately 135 basis points lower than the retail certificate of deposit portfolio. Interest-bearing checking balances accounted for $9 million of the increase in deposits. Non-interest-bearing checking account balances also increased $9 million. The decrease in short-term borrowings was the result of lower balances in securities sold under repurchase agreements with customers. FHLBank advances were reduced as the increase in deposits provided necessary funding. Management continues to feel that FHLBank advances and brokered deposits are viable alternatives to retail deposits when factoring in all the costs associated with the generation and maintenance of additional retail deposits.

       Stockholders' equity increased $2.3 million primarily as a result of net income of $5.4 million, partially offset by dividend declarations of $1.9 million, unrealized depreciation on available-for-sale securities of $1.0 million and net repurchases of the Company's common stock of $0.2 million. The Company repurchased 8,695 shares of common stock at an average price of $28.87 per share during the three months ended March 31, 2002 and reissued 14,959 shares of treasury stock at an average price of $15.00 per share to cover stock option exercises.


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RESULTS OF OPERATIONS AND COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 2002 AND 2001

       The increase in net income of $675,000, or 14.3%, for the three months ended March 31, 2002 compared to the same period in 2001, was primarily due to an increase in net interest income of $412,000, or 3.7%, a decrease in provision for loan losses of $300,000, or 18.2%, and an increase in non-interest income of $116,000, or 2.7%. This was partially offset by an increase in provision for income taxes of $213,000, or 8.4%, during the three month period.

Total Interest Income

       Total interest income decreased $5.0 million, or 20.3%, during the three months ended March 31, 2002, when compared to the three months ended March 31, 2001. The decrease was due to a $5.7 million, or 26.7%, decrease in interest income on loans, partially offset by a $657,000, or 19.0%, increase in interest income on investment securities and other interest-earning assets. Interest income on investment securities and other interest-earning assets increased due to higher average balances. Interest income on loans also increased due to higher average balances, but was significantly reduced by lower average rates.

       While there were no significant unusual items impacting interest income in the quarter ended March 31, 2002, interest income for the three months ended March 31, 2001, was higher, in part, due to the following items:

  • Interest income was positively impacted by a recovery of $420,000 of interest on a commercial real estate loan that was charged off in a prior year.


  • Interest income was positively impacted by a recovery of $280,000 of interest on a loan relationship that was removed from non-performing status.


  • Interest income was positively impacted by yield increases due to securities that were purchased at discounts and were called at par value. This resulted in an increase of approximately $500,000.


Interest Income - Loans

        During the three months ended March 31, 2002, interest income on loans decreased due to lower average interest rates, partially offset by higher average balances. Interest income decreased $7.4 million as the result of lower average interest rates. The average yield on loans decreased from 9.33% during the three months ended March 31, 2001, to 6.38% during the three months ended March 31, 2002, primarily due to lower market rates of interest. A large portion of the Bank's loan portfolio adjusts with changes to the "prime rate" of interest. The prime rate of interest averaged 8.63% during the three months ended March 31, 2001, compared to an average of 4.75% during the three months ended March 31, 2002.



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        Interest income increased $1.7 million as the result of higher average loan balances from $916 million during the three months ended March 31, 2001, to $983 million during the three months ended March 31, 2002. The higher average balance resulted from the Bank's increases in commercial real estate and construction lending, multi-family residential lending, and indirect dealer consumer lending. The Bank's one- to four-family residential loan portfolio has decreased since December 31, 2000, due to the origination of a greater dollar amount of fixed-rate rather than adjustable-rate loans. The Bank generally sells these fixed-rate loans in the secondary market.

Interest Income - Investment Securities and Other Interest-Earning Assets

        Interest income on investment securities and other interest-earning assets increased from higher average balances, partially offset by lower average interest rates during the three months ended March 31, 2002 when compared to the three months ended March 31, 2001. Interest income increased $1.1 million as a result of higher average balances from $184 million during the three months ended March 31, 2001 to $283 million during the three months ended March 31, 2002. This increase was primarily in available-for-sale securities, where additional securities were acquired for liquidity and for pledging to deposit accounts under repurchase agreements and public funds. Interest income decreased $476,000 as a result of lower average yields from 7.51% during the three months ended March 31, 2001, to 5.81% during the three months ended March 31, 2002, due to lower market rates of interest in 2002 and the yield increases in 2001 discussed above.

Total Interest Expense

        Total interest expense decreased $5.5 million, or 40.2%, during the three months ended March 31, 2002 when compared with the same period in 2001. The decrease during the three month period was due to a $3.4 million, or 36.8%, decrease in interest expense on deposits, a $1.7 million, or 48.0%, decrease in interest expense on FHLBank advances, and a $297,000, or 47.6%, decrease in interest expense on short-term borrowings and trust preferred securities.

Interest Expense - Deposits

        Interest expense on deposits increased $2.4 million as a result of higher average balances of time deposits from $566 million during the three months ended March 31, 2001, to $682 million during the three months ended March 31, 2002, and decreased $5.6 million due to lower average interest rates on time deposits from 6.11% during the three months ended March 31, 2001, to 3.21% during the three months ended March 31, 2002. The average balances on time deposits increased as a result of the Bank's continued use of brokered deposits and due to additional retail certificates of deposit. The average interest rates decreased due to lower overall market rates of interest and the effects of the Company's interest rate swaps. Interest on demand deposits increased $307,000 due to higher average balances from $125 million during the three months ended March 31, 2001, to $160 million during the three months ended March 31, 2002, and decreased $496,000 due to lower average rates from 2.00% during the three months ended March 31, 2001, to 1.09% during the three months ended March 31, 2002. Interest on savings deposits decreased $71,000 due to lower average balances from $18 million during the three months ended March 31, 2001, to $1 million during the three months ended March 31, 2002. The change in average balances for savings deposits resulted from the Company's change of product offerings and the reclassification of certain account types.



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Interest Expense - FHLBank Advances, Short-term Borrowings and Trust Preferred Securities

        Interest expense on FHLBank advances, short-term borrowings and trust preferred securities decreased $2.2 million due to lower average rates of interest from 5.87% in the three months ended March 31, 2001 to 2.94% in the three months ended March 31, 2002. The Company's use of FHLBank advances and short-term borrowings which reprice daily or monthly contributed to the significant decrease in average rates of interest. This decrease was partially offset ($165,000) by an increase in average balances from $287 million during the three months ended March 31, 2001, to $297 million during the three months ended March 31, 2002. The average balance increase was used primarily to fund growth in investment securities.

Net Interest Income

        The Company's overall interest rate spread decreased 16 basis points, or 4.5%, from 3.57% during the three months ended March 31, 2001, to 3.41% during the three months ended March 31, 2002. The decrease was due to a 278 basis point decrease in the weighted average yield received on interest-earning assets, partially offset by a 262 basis point decrease in the weighted average rate paid on interest-bearing liabilities. In comparing the two periods, the yield on loans decreased 295 basis points while the yield on investment securities decreased 170 basis points. The rate paid on deposits decreased 248 basis points while the rate paid on FHLBank advances and other borrowings decreased 293 basis points. The Company's overall net interest margin decreased 40 basis points, or 9.8%, from 4.09% during the three months ended March 31, 2001, to 3.69% during the three months ended March 31, 2002. See the discussion of items which impacted net interest income in 2001 above in "Total Interest Income."

       The prime rate of interest averaged 8.63% during the three months ended March 31, 2001, compared to an average of 4.75% during the three months ended March 31, 2002. As a large percentage of the Bank's loans are tied to prime, this decrease was the primary reason for the decrease in the weighted average yield received on interest-earning assets.

Provision for Loan Losses

       The provision for loan losses decreased from $1.7 million during the three months ended March 31, 2001 to $1.4 million during the three months ended March 31, 2002. The 2001 period included a $600,000 provision and related charge-off for one non-performing loan relationship.

        Management records a provision for loan losses in an amount it believes sufficient to result in an allowance for loan losses that will cover current net charge-offs as well as risks believed to be inherent in the loan portfolio of the Bank. The amount of provision charged against current income is based on several factors, including, but not limited to, past loss experience, current portfolio mix, actual and potential losses identified in the loan portfolio, economic conditions, regular reviews by internal staff and regulatory examinations.



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       Weak economic conditions, higher inflation or interest rates, or other factors may lead to increased losses in the portfolio. Management has established various controls in an attempt to limit future losses, such as a watch list of possible problem loans, documented loan administration policies and a loan review staff to review the quality and anticipated collectibility of the portfolio. Management determines which loans are potentially uncollectible, or represent a greater risk of loss, and makes additional provisions to expense, if necessary, to maintain the allowance at a satisfactory level.

       Non-performing assets increased $1.9 million during the three months ended March 31, 2002 from $12.6 million at December 31, 2001 to $14.5 million at March 31, 2002. Non-performing assets as a percentage of total assets were 1.06% at March 31, 2002. Non-performing loans increased $2.4 million, or 25.5%, from $9.6 million at December 31, 2001 to $12.0 million at March 31, 2002. Foreclosed assets decreased $0.5 million, or 18.0%, from $3.0 million at December 31, 2001 to $2.5 million at March 31, 2002. Non-performing loans increased primarily as a result of the addition of one relationship totaling $2.3 million. This relationship is comprised of twenty-seven loans which are primarily secured by residential rental properties. The reduction in foreclosed assets results primarily from the sale of a single-family residence which was described in the December 31, 2001 Annual Report on Form 10-K.

       Potential problem loans decreased $0.7 million during the three months ended March 31, 2002 from $18.7 million at December 31, 2001 to $18.0 million at March 31, 2002. Significant relationships included in potential problem loans involve one $8.4 million relationship secured by condominium buildings and lots, single-family residences and lots, and other developed land located at the Lake of the Ozarks, Missouri and one $3.6 million relationship secured by a motel in Springfield, Missouri. Potential problem loans are loans which management has identified through routine internal review procedures as having possible credit problems which may cause the borrowers difficulty in complying with current loan repayment terms. These loans are not reflected in the non-performing loans.

       The Bank's allowance for loan losses as a percentage of total loans was 2.28% and 2.10% at March 31, 2002, and December 31, 2001, respectively. Management considers the allowance for loan losses adequate to cover losses inherent in the Company's loan portfolio at this time, based on current economic conditions. If economic conditions deteriorate significantly, it is possible that additional assets would be classified as non-performing, and accordingly, additional provisions for losses would be required, thereby adversely affecting future results of operations and financial condition.



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Total Non-interest Income

       Total non-interest income increased $116,000, or 2.7%, in the three months ended March 31, 2002 when compared to the same period in 2001. The increase was primarily due to: (i) an increase in net realized gains on sales of fixed-rate residential and student loans of $82,000, or 23.0%; and (ii) an increase in net realized gains on sales of available-for-sale securities of $595,000. During the three months ended March 31, 2002, the Bank sold more residential and student loans than in the same period during 2001. During the 2002 period, lower interest rates were conducive to the generation of fixed-rate mortgages, which the Bank typically sells, rather than adjustable-rate mortgages, which the Bank typically retains in its portfolio. The increase in gain on sale of available-for-sale securities was due to the sale of U. S. agency bonds with relatively high price volatility in the event of sharply rising interest rates. Management elected to sell these bonds at a premium and reinvest the proceeds.

       This increase was partially offset by a decrease in commission revenues earned by the Company's travel and investment subsidiaries in 2002 of $252,000, or 14.5%. Both subsidiaries have experienced decreased sales activity as a result of general economic conditions prevailing in 2001 and 2002. The investment subsidiary has been adversely affected by declining activity by investors in the U. S. stock markets. The travel subsidiary has been adversely affected by the merger of American Airlines and Trans World Airlines (TWA). Special incentives negotiated between the travel subsidiary and TWA were discontinued in 2001 as a result of the merger. In 2002, many airlines and other vendors have reduced or eliminated commissions paid to travel agencies. Also, the Company incurred expenses on foreclosed assets of $327,000 in 2002 versus expenses on foreclosed assets of $82,000 in 2001. In 2002, the Company incurred expenses of $200,000 to provide for potential losses on foreclosed assets due to additional valuation allowances on certain properties.

Total Non-interest Expense

       Total non-interest expense decreased $60,000, or 0.9%, in the three months ended March 31, 2002, compared to the same period in 2001. The decrease was primarily due to a reduction in other operating expenses of $389,000, or 31.4%. The 2001 period included approximately $250,000 of fees paid to consultants for implementation of new customer products and services.

       This decrease was partially offset by: (i) an increase of $274,000, or 7.6%, in salaries and employee benefits primarily due to normal merit increases for existing employees and the hiring of additional experienced personnel to fill key supervisory and customer sales positions; (ii) an increase in net occupancy and equipment expense of $120,000, or 11.5%, primarily due to increases in depreciation; and (iii) other increases and decreases in non-interest expense areas.

Provision for Income Taxes

       Provision for income taxes as a percentage of pre-tax income decreased from 34.8% in the three months ended March 31, 2001, to 33.7% in the three months ended March 31, 2002, as a result of additional tax-exempt investments.



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Average Balances, Interest Rates and Yields

       The following table presents, for the periods indicated, the total dollar amount of interest income from average interest-earning assets and the resulting yields, as well as the interest expense on average interest-bearing liabilities, expressed both in dollars and rates, and the net interest margin. Average balances of loans receivable include the average balances of non-accrual loans for each period. Interest income on loans includes interest received on non-accrual loans on a cash basis. The table does not include non-interest-bearing demand deposits and does not reflect any effect of income taxes.



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Three Months Ended March 31,
2002
2001
Average Yield/ Average Yield/
Balance
Interest
Rate
Balance
Interest
Rate
(Dollars in thousands)
Interest-earning assets:
  Loans receivable $   982,710     $15,673 6.38% $   916,429     $21,379 9.33%
  Investment securities and other
     interest-earning assets		 282,844    
 4,107
 5.81    
 183,735    
 3,450
 7.51    
  Total interest-earning assets $1,265,554    
 19,780
 6.25    
 $1,100,164    
 24,829
 9.03    
Interest-bearing liabilities:
  Demand deposits $   160,169     435 1.09     $   124,891     624 2.00    
  Savings deposits 1,112     4 1.44     18,043     104 2.31    
  Time deposits 682,310    
 5,482
 3.21    
 565,539    
 8,637
 6.11    
    Total deposits 843,591     5,921 2.81     708,473     9,365 5.29    
  FHLBank advances and other borrowings 297,324    
 2,189
 2.94    
 286,515    
 4,206
 5.87    
  Total interest-bearing liabilities $1,140,915    
 8,110
 2.84    
 $   994,988    
 13,571
 5.46    
Net interest income:
  Interest rate spread $11,670
 3.41%
 $11,258
 3.57%
Net interest margin(1) 3.69%
 4.09%
Average interest-earning assets to
  average interest-bearing liabilities
110.92%
110.57%

(1) Defined as the Company's net interest income divided by total interest-earning assets.



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Rate/Volume Analysis

       The following table presents the dollar amount of changes in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities for the periods shown. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (i) changes in rate (i.e., changes in rate multiplied by old volume) and (ii) changes in volume (i.e., changes in volume multiplied by old rate). For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately to volume and to rate.

Three Months Ended
March 31,
2002 vs. 2001
Increase
(Decrease)
Due to
Total
Increase
(Decrease)
Rate
 Volume
(Dollars in thousands)
Interest-earning assets:
  Loans receivable $(7,397) $1,691  $(5,706)
  Investment securities and
    other interest-earning assets (476)
 1,133 
 657 
        Total interest-earning assets (7,873)
 2,824 
 (5,049)
Interest-bearing liabilities:
  Demand deposits (496) 307  (189)
  Savings deposits (29) (71) (100)
  Time deposits (5,591)
 2,436 
 (3,155)
        Total deposits (6,116) 2,672  (3,444)
  FHLBank advances and other borrowings (2,182)
 165 
 (2,017)
                Total interest-bearing liabilities (8,298)
 2,837 
 (5,461)
  Net interest income $    425 
 $    (13)
 $    412 




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Liquidity and Capital Resources

        Liquidity is a measure of the Company's ability to generate sufficient cash to meet present and future financial obligations in a timely manner through either the sale or maturity of existing assets or the acquisition of additional funds through liability management. These obligations include the credit needs of customers, funding deposit withdrawals, and the day-to-day operations of the Company. Liquid assets include cash, interest-bearing deposits with financial institutions and certain investment securities and loans. As a result of the Company's management of the ability to generate liquidity primarily through liability funding, management believes that the Company maintains overall liquidity sufficient to satisfy its depositors' requirements and meet its customers' credit needs. At March 31, 2002 the Company had commitments of approximately $131 million to fund loan originations, issued lines of credit, outstanding letters of credit and unadvanced loans.

       Management continuously reviews the capital position of the Company and the Bank to ensure compliance with minimum regulatory requirements, as well as exploring ways to increase capital either by retained earnings or other means.

       The Company's stockholders' equity was $87.6 million, or 6.6% of total assets of $1.33 billion at March 31, 2002, compared to equity of $85.3 million, or 6.4%, of total assets of $1.32 billion at December 31, 2001.

        Banks are required to maintain minimum risk-based capital ratios. These ratios compare capital, as defined by the risk-based regulations, to assets adjusted for their relative risk as defined by the regulations. Guidelines require banks to have a minimum Tier 1 risk-based capital ratio, as defined, of 4.00%, a minimum total risk-based capital ratio of 8.00%, and a minimum 4.00% core capital ratio. To be considered "well capitalized," banks must have a minimum Tier 1 risk-based capital ratio, as defined, of 6.00%, a minimum total risk-based capital ratio of 10.00%, and a minimum 5.00% core capital ratio. On March 31, 2002, the Bank's Tier 1 risk-based capital ratio was 9.42%, total risk-based capital ratio was 10.68% and the core capital ratio was 7.45%. As of March 31, 2002, the Bank was "well capitalized" as defined by the Federal banking agencies' capital-related regulations. The Federal Reserve Bank has established capital regulations for bank holding companies that generally parallel the capital regulations for banks. On March 31, 2002, the Company's Tier 1 risk-based capital ratio was 10.15%, total risk-based capital ratio was 11.41% and the leverage ratio was 8.03%. As of March 31, 2002, the Company was "well capitalized" as defined by the Federal banking agencies' capital-related regulations.

        At March 31, 2002, the held-to-maturity investment portfolio included $53,000 of gross unrealized losses. The unrealized losses are not expected to have a material effect on future earnings beyond the usual amortization of acquisition premium or accretion of discount because no sale of the held-to-maturity investment portfolio is foreseen.

        The Company's primary sources of funds are certificates of deposit, FHLBank advances, other borrowings, loan repayments, proceeds from sales of loans and available-for-sale securities and funds provided from operations. The Company utilizes particular sources of funds based on the comparative costs and availability at the time. The Company has from time to time chosen not to pay rates on deposits as high as the rates paid by certain of its competitors and, when believed to be appropriate, supplements deposits with less expensive alternative sources of funds.



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       Statements of Cash Flows. During the three months ended March 31, 2002, and 2001, respectively, the Company experienced positive cash flows from operating activities and financing activities.

       Cash flows from operating activities for the periods covered by the Statements of Cash Flows have been primarily related to changes in accrued and deferred assets, credits and other liabilities, the provision for loan losses, the provision for losses on foreclosed assets, depreciation, and the amortization of deferred loan origination fees and discounts (premiums) on loans and investments, all of which are non-cash or non-operating adjustments to operating cash flows. Net income adjusted for non-cash and non-operating items and the origination and sale of loans held-for-sale were the primary sources of cash flows from operating activities during the three months ended March 31, 2002 and 2001. Operating activities provided cash flows of $14.5 million during the three months ended March 31, 2002, and $11.1 million during the three months ended March 31, 2001.

       During the three months ended March 31, 2002 and 2001, respectively, investing activities used cash of $21.7 million and $26.9 million primarily due to the net increase in loans and investment securities.

       Changes in cash flows from financing activities during the periods covered by the Statements of Cash Flows are due to increases in deposits after interest credited, offset by decreases in FHLBank advances, decreases in short-term borrowings, as well as purchases of treasury stock and dividend payments to stockholders. Financing activities provided $3.7 million in cash during the three months ended March 31, 2002 and $25.3 million in cash during the three months ended March 31, 2001. Financing activities in the future are expected to primarily include changes in deposits, FHLBank advances, and short-term borrowings, purchase of treasury stock, and payment of dividends.

       Dividends. During the three months ended March 31, 2002 the Company declared dividends of $.265 per share and paid dividends of $.125 per share, or 16% of net income per share, compared to dividends declared and paid during the three months ended March 31, 2001 of $.125 per share, or 19% of net income per share. The Board of Directors meets regularly to consider the level and the timing of dividend payments.

       Common Stock Repurchases. The Company has been in various buy-back programs since May 1990. During the three months ended March 31, 2002, the Company repurchased 8,695 shares of its common stock at an average price of $28.87 per share and reissued 14,959 shares of treasury stock at an average price of $15.00 per share to cover stock option exercises. During the three months ended March 31, 2001, the Company repurchased 2,408 shares of its common stock at an average price of $17.78 per share and reissued 587 shares of treasury stock at an average price of $11.46 per share to cover stock option exercises.

       Management intends to continue its stock buy-back programs from time to time as long as repurchasing the stock contributes to the overall growth of shareholder value after taking into consideration the earnings of the Company and other alternative uses of available capital. The number of shares of stock that will be repurchased and the price that will be paid are the result of many factors, several of which are outside of the control of the Company. The primary factors, however, are the number of shares available in the market from sellers at any given time and the price of the stock within the market as determined by the market.



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ITEM III. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

       As discussed in the "Asset and Liability Management and Interest Rate Risk" section of Management's Discussion and Analysis, the Company utilizes interest rate swaps to effectively convert a portion of its fixed rate brokered deposits and fixed rate trust preferred securities to variable rates of interest.

       In addition to the disclosures previously made by the Company in the December 31, 2001, Annual Report on Form 10-K, the following table summarizes interest rate sensitivity information for the Company's interest rate derivatives at March 31, 2002.

Fixed to Average Average
Variable
 Pay Rate
 Receive Rate
Interest Rate Derivatives (In Millions)
Interest Rate Swaps:
     Expected Maturity Date
          2002 $ 35.9 1.38% 6.18%
          2003 31.0 1.04     5.88    
          2004 7.0 1.69     6.57    
          2005 15.5 1.35     6.20    
          2006 10.0 2.08     5.30    
          2007 25.0 1.92     4.10    
          2008 7.6 1.63     5.93    
          2009 34.8 1.94     5.76    
          2011 15.0 1.99     6.17    
          2016 59.5 1.97     6.22    
          2017 15.0 1.95     6.48    
          2031 17.3
 3.98    
 9.00    
     Total Notional Amount $273.6
 1.86%
 6.08%
     Fair Value $274.8




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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

       From time to time, the Company and its subsidiaries are involved as plaintiff or defendant in various legal actions arising in the normal course of their business. While the ultimate outcome of the various legal proceedings involving the Company and its subsidiaries cannot be predicted with certainty, it is the opinion of management, after consultation with legal counsel, that these legal actions currently are not material to the Company.

Item 2. Changes in Securities

       None.

Item 3. Defaults Upon Senior Securities

       None.

Item 4. Submission of Matters to Vote of Common Stockholders

       None.

Item 5. Other Information

       None.

Item 6. Exhibits and Reports on Form 8-K

       a) Exhibits

       See the attached Exhibit 11, Statement re computation of earnings per share.

       b) Reports on Form 8-K

       None.




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SIGNATURES

       Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Great Southern Bancorp, Inc.
Registrant

Date: May 6, 2002 /s/ Joseph W. Turner
Joseph W. Turner
President and Chief Executive Officer
(Principal Executive Officer)



Date: May 6, 2002 /s/ Rex A. Copeland
Rex A. Copeland
Treasurer
(Principal Financial and Accounting Officer)


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Exhibit Index


Exhibit
No.
 Description
11 Statement Re Computation of Earnings Per Share


















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Exhibit 11- Statement Re Computation of Earnings Per Share
Three Months Ended
March 31,
2002
 2001
Basic:
  Average shares outstanding 6,865,558
 6,896,839
  Net income $5,402,443
 $4,727,132
  Per share amount $0.79
 $0.69
Diluted:
  Average shares outstanding 6,865,558 6,896,839
  Net effect of dilutive stock options -
    based on the treasury stock method
    using average market price 58,726
 117,530
  Diluted shares 6,924,284
 7,014,369
  Net income $5,402,443
 $4,727,132
  Per share amount $0.78
 $0.67


Note: Antidilutive stock options totaling 72,325 shares were not included in the calculation of diluted earnings per share at March 31, 2001. There were no antidilutive stock options at March 31, 2002.


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END